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401(k)s Hang on as Stock Market Ride Gets Rough

Financial advisers and executives at retirement plan providers said that employees, while tending toward caution, do not appear to be panicked. During the wild swings a few weeks ago, participants largely sought information.

August 23, 2011
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Related Topics: Finance/Taxes, Retirement/Pensions, Benefit Design and Communication, Defined Benefit Plans, Retirement Planning, Latest News
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Even though the stock market's roller coaster ride has taken a screaming drop in recent weeks, retirement plan participants appear to have chosen to keep their hands and feet inside the cars, according to major plan administrators and record keepers.

At J.P. Morgan Retirement Plan Services, which administers $121 billion in retirement assets, plan participants on Aug. 8 and 9 transferred just $833 million, which is less than 0.7 percent of the asset base.

Principal Financial Group said that 6,406 of the 2.4 million participants in plans that it administers made transfers on Aug. 8, more than three times the 2,000 participants who make a transaction on a typical day. Still, just 0.25 percent of plan participants took action on the day the Dow Jones Industrial Average lost 5.5 percent.

Wells Fargo Institutional Retirement and Trust reported about $1 billion flowed into stable-value funds between Aug. 1 and Aug. 15, less than 1 percent of the $164 billion in plan assets, exclusive of defined benefit plans, which Wells Fargo administers.

“Most vendors haven't seen huge numbers of transactions moving assets out of equities into other investments,” said Robyn Credico, head of the defined contribution practice at Towers Watson & Co. “In fact, they haven't seen much activity at all.”

At Great-West Retirement Services, a subsidiary of Great-West Life & Annuity Insurance Co. that oversees $150 billion in plan assets, $166 million moved from equities to fixed-income and stable-value investments during the first two weeks of August, with $74 million moving Aug. 8 alone. Between Aug. 10 and Aug. 12, however, $13 million flowed back into equities, according to company president Charles Nelson.

Financial advisers who work with small to midsize plans report a similar lack of activity.

“I received six calls; three people decided to be conservative,” said Michael Preisz, president of Preisz Associates Inc. and a member of the Institutional Retirement Income Council.

The firm manages about $300 million and oversees 100 group retirement plans, each with less than $5 million in assets. The three participants who sought safety were over age 55 and wanted to shift more money to debt.

“A small percentage of people wanted to make changes into conservative options,” noted Joe Connell, a senior benefits consultant with Financial Concepts Inc. The firm works with 103 plans that represent more than $1.1 billion. Those individuals who did shift into stable-value funds were within 10 years of retiring.

Financial advisers and executives at retirement plan providers said that employees, while tending toward caution, do not appear to be panicked. During the wild swings a few weeks ago, participants largely sought information.

On Aug. 8, call volume at retirement plan service centers reached levels set in late 2008, but “the emotion wasn't anywhere near what it was in 2008,” said Barrie Christman, vice president of retirement and investor services at Principal Financial.

“If there's anything as a silver lining, I think that [2008] has taught people that these kinds of fluctuations can happen,” she added.

Gary Allen, a financial adviser with Prudent Investor Advisors, agreed.

He noted that in 2008 and 2009, clients realized that a systemic downturn was taking place and nobody would be safe.

“In 2008 and 2009, we thought it would be a death march and we were ready to hand out the flak jackets and helmets,” he said. “The situation now is normal—it's volatile, but that's all the more reason to concentrate on what you can control.”

Another possible contributor to the lack of activity is plan participants' traditional inertia and the fact that more of them now invest in target date funds, a popular default investment, which could make them less likely to make changes.

“The people who go into these target date funds are people who either made an active election or were defaulted; they tend to be passive in behavior,” Credico said.

Not all plan advisers are riding out the volatility. Those working with separately managed accounts and using a tactical investment approach have moved to cash.

Braver Wealth Management, which manages $575 million and works with plans under $20 million in size, uses quantitative modeling to rotate clients into and out of equities.

Braver's model detected volatility in late July and moved assets fully into cash by Aug. 4, missing the massive decline that took place days later.

“We still reside in cash,” said David D'Amico, president of the firm. “You had a few decent days, but that's not enough for the model to say that it's safe to get back in.”

Randy Mowdy, an adviser with Alliance Trust Co., took a similar tack, placing about $800 million into cash Aug. 5 and staying there.

“That's a lot of money that we've preserved,” he said. “Because of our economy today and the potential for another recession, the chances are good that we're going to go back and test those [market] lows.”

D'Amico noted that although the tactical model doesn't buy back into the market at the absolute lowest, nor does it bail at the summit of a climb, the concept keeps plan clients disciplined.

“People sell into the fear and buy back 20 percent higher,” he said. “These tactical strategies are tools advisers can use to better manage their risk and stick to long-term discipline.”   

Filed by Darla Mercado of InvestmentNews, a sister publication of Workforce Management. To comment, email editors@workforce.com.

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